In last week's sentiment report, traders were somewhat fearful, even with stocks rising like a phoenix off the February 9 low.
Since that low, we had:
-6 straight days up with markets finishing near the highs each day
-2 down days
-1 anemic up day with a finish near the day's lows
So let's measure how traders are feeling in this new age of volatility.
(click here for a primer on the sentiment indicators below)
1) VIX Spread – Bearish
On Tuesday, February 6, the VIX hit a multi-year high at 50.30, and it's slowly drifted back under 20, which puts it within range of historical norms.
The VIX curve is still inverted, with a 3-month spread around -1.5.
This means traders are still pricing in significant volatility, which makes sense. Ever since volatility exploded in early February, we've seen a huge expansion in range.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bearish
The Fear & Greed Index is at 15, which is flat from last week.
This index operates on a 0-100 scale, and a reading of 15 means traders are very fearful (or bearish).
This is a shocking change. Fear & Greed was at 76 just a month ago.
3) AAII Sentiment – Bullish
The American Association of Individual Investors' Sentiment Survey shows that 44.7% of those surveyed are bullish. This is down 3.8% from last week's 48.5% reading.
The long-term average is 38.4%, so we're back in bullish territory.
But keep in mind that AAII sentiment tends to lag the action a bit. It was pretty neutral for most of 2017, even with markets hitting one record high after another.
4) CBOE Equity Put-Call – Neutral
The long-term average of the CBOE equity put-call ratio is 0.63.
The 10-day moving average is now 0.662, which is basically in-line with the long-term average of 0.654.
Options traders were insanely bullish from December through early February. Then they got incredibly bearish as markets started breaking down.
Now they're looking neutral.
Out of 4 sentiment indicators, we have:
Ack! We're in the most boring positions possible.
Stocks are consolidating and sentiment looks just a tad bearish.
There's no extreme in the technical position of the markets, and there's no extreme in sentiment either.
That makes it hard to have a firm opinion on where things can go from here, but here's an ideal possible scenario for the bulls.
We keep bouncing sideways for the next month or so, perhaps between 2660 and 2760, with several breakdowns and breakouts that don't have follow-through.
If that happens, perhaps bearish sentiment will build up to provide the market with upside fuel for a breakout back towards the 2872.87 high.
On the flip side, the best scenario for the bears would be a slow, ugly descent before a major break below the SPX' 200 day moving average, which was lost and then quickly reclaimed on the big 2/9 rebound day.
Here's an SPX chart laying out these levels:
Another thing to wonder about is whether we've set a higher baseline range for the VIX.
As you can see, it spent an awful lot of time between 9 and 15, which was outrageously low.
It will be interesting to see if traders price in a “closer to normal” range for expected volatility.
(Related: Primer on the VIX)